July 23, 2007 – Analyzing if a huge merger would pass monopoly scrutiny

By Steve Bauer
Managing Editor
Although Honda Motor Co. has squashed recent rumors that it’s looking to buy Harley-Davidson, the possibility of the two motorcycle titans combining raised eyebrows in the industry and begs the question of whether such a massive merger could ever pass federal anti-trust regulations.
At first thought it might seem like a no-brainer, considering the two companies already control a healthy chunk of the motorcycle industry’s market share by themselves, and combined would have the market cornered in the profitable cruiser and touring segments. But in truth, such a merger might not even garner a second glance from the Federal Trade Commission (FTC).
It’s no surprise that merger rumors have been rampant recently in the powersports industry as nearly every sector of business on a global level has been affected by such moves. The value of mergers has risen to a record $2.7 trillion this year — a 50 percent increase over 2006, according to statistics recently published by the Kansas City Star. But what chance would a mega-merger in the powersports industry have of getting past the FTC?

A what-if scenario
Speaking hypothetically about the previously rumored H-D/Honda merger, Mitch Katz, public affairs specialist for the FTC, says because of Harley’s unique brand recognition in the market, the issue becomes complicated.
“It would have to be reported to the FTC by law if it’s more than
$59.6 million, and I’m assuming this would be a multi-billion-dollar transaction,” Katz said. “So Honda would first have to purchase H-D, and then they’d report it to us.”
After an acquisition is reported to the FTC, the agency conducts a 30-day initial review to ensure the merger meets all guidelines and would then either approve the merger or extend its review time if more investigation is needed. Because Honda and H-D both sell motorcycles, Katz says the FTC would look at a number of issues related to each company’s consumer base and product line. Another big issue would be whether there’s another competitor that would be able to offer consumers a similar product to what H-D manufacturers.
“In this case, we’d want to know if the same consumers buy Harleys and Hondas, and if Harleys and Hondas are sold in the same locations or near the same locations? But the most complicated issue here would be the question of substitution,” Katz said. “Although Honda might make a cruiser that’s similar, they certainly don’t make something that is a Harley. There would have to be a similar motorcycle out there a consumer could substitute for a Harley.
“If Honda acquired H-D and for whatever reason raised prices on all Harley models, would consumers consider buying another company’s cruisers or touring bikes, or would they only be able to buy Harleys to get the product they want? Where the problem would come in is if consumers had no alternatives in the market that would be comparable to a Harley, and were forced to purchase them from Honda only.”
Katz says another issue that is high on the FTC’s watch list is what Company A decides to do with Company B in terms of making it part of its brand name or operating it as a separate entity.
“Just speaking hypothetically on background, let’s say Honda buys Harley and they continue to operate it as a separate entity,” Katz said. “They don’t change the name to Honda, they keep calling it Harley. And if they’re just going to keep it as a separate company and essentially buy it as an investment, then that might not be anti-competitive. A lot of it depends on what they intend to do with it, and what the competition is now and what it would be afterward. It would be different if the major competitor with Harley was some Honda line that kind of looked like Harleys.”

Market share mathematics
Although both Honda and H-D hold large shares of the market, Katz says the FTC doesn’t use a hard number to determine whether a merger would be anti-competitive.
“There isn’t a hard-set number as far as market share that we look at to determine whether to look at a specific merger. It’s done on a case-by-case basis,” he said.
“It depends on many factors, including where the companies are located geographically, for example. If they control a large percentage of the market but they’re in highly different geographic markets, it would alleviate some of our concerns.”
Katz says the agency also uses economic guidelines to help it determine whether a potential acquisition can be anti-competitive, including a mathematical formula that looks at the market concentration. The formula helps the FTC develop what that number is pre merger, and what it would be post merger. If the number increases past a certain amount, it’s a reliable indicator of whether the merger would be anti-competitive or not.
Although economic factors do play a big part in the decision-making process, Katz notes that sometimes other factors can outweigh them.
“There was a case recently where the three largest companies in the cruise line industry — Carnival, Princess and Royal Caribbean — passed FTC guidelines and were allowed to merge,” Katz said. “Although their market share concentration was more than 60 percent, the FTC determined that other factors outweighed the economic data.”

Deal or no deal?
So does Katz believe that a Honda/H-D merger would make it past the FTC? He wouldn’t comment specifically, but says the more two companies mirror each other in makeup, product and how they do business, the harder it will be for them to merge.
“I know it’s even silly to think about this but as an example let’s use Coke trying to buy Pepsi,” he said. “First, they both make the same product. And they not only make the same cola product, but they make the same diet cola product, the same water, sports drink, etc., and they sell worldwide and to the same consumers. And on top of that there’s no strong No. 3 competitor. The more of those things that line up, the harder it will be to get a transaction through.”
Katz cautions that he has seen previously unthinkable mergers make it through, yet has also witnessed “sure things” fail to pass.
“You never know how it’s going to work out,” he said. “Two years ago, Maytag came out and said they wanted to buy Whirlpool. These are both national appliance companies that sell to the same consumer. They sell the same product and they’re the top two competitors in the market. What’s the chance of something like that going through? You’d think little to none, but guess what, it passed. It’s very strange sometimes how it works.”

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